Many commentators expect the appreciation of the yuan to force China to invest more in US Treasury bonds. These speculations ignore the fact that China is the major purchaser of U.S. Treasuries because of its exchange rate policy. The historical data shows that China’s exchange rate policy was complemented by China’s ownership of U.S. Treasury securities, more than some economists will admit.

Sorry for being ignorant, is it JP Morgan or Morgan Stanley? I thought these are 2 different companies!

I agree with Atrus about exporting goods to the world and as Atrus is talking about the World and not just the USA. By devaluing the Yuan, China has an unfair advantage and other developing countries suffer as a result.

Atrus: You must be joking....
If anyone is (and has continually) manipulated their currency, its the USA.... For an economics lesson, go to: http://apps.edgyinchina.org/Blog/

Even the Chairman of JP Morgan Stanley Asia, understands whats going on when he says: "It is bad politics driving bad economics"

BTW, Germany has pegged its currency to the Euro for these last 2 years, and has a greater current account balance with the US than China, but I don't hear anyone complaining about the price of schnitzel....
Get schooled... It's educational.

@tp1024: You must remember Sir/Ma'am that China is the one manipulating currency. They have pegged their currency to the US dollar, creating an artificially devalued currency, allowing them to export more goods than they should be able to on the world stage. This prices out other emerging economies, ensuring that China eternally has an edge.

The rest of the world is merely asking that China allow its currency to fluctuate normally on the world market, which should (in theory) place its exports at the correct prices, allowing other emerging economies to compete. The US is not forcing China to manipulate its currency; it's asking them to stop doing so.

> How would the US depreciate its currency versus the yuan if China keeps the yuan's value fixed against the dollar?

How did Archilles overtake the tortoise, even though it kept running away from him a bit further for every bit that he managed to catch up?

You're looking at it in the wrong way. Depreciating the Yuan is not for free. The further it is depreciated, the more expensive it becomes to import raw materials from elsewhere, which will tend to interfere with Chinese economic growth.

Also, the USA doesn't just have a negative current account balance with China, but also with the rest of the world. And that would improve even if China kept the yuan steady with respect to the US dollar all the way through (which it couldn't). China is by far not the only trading partner of the USA, it just so happens that the US has lost most of its competitiveness with them after several decades in which finance was called an "industry".

The quesiton inevitably goes down to "should the world trade balance out country by country?"

My view is it has to take into consideration of each country's demographic make-up. When people are young, they learn; when grown up, they work and they save; when old and retired, they spend.

China has a one-child policy and the population dividend is now in full force. A large portion of Chinese population are working now (Economist, please prepare a table of all countries' working population), they consume, they export and they save. The is the root cause of China's trade surplus and high savings rate. In 10 to 20 years time, China will have a huge trade deficit as its population age and retire.

The challenge is for the Chinese to invest their savings properly and generate good income years later.

In 20 years, Mr. Schumar's children will be exporting to China with a big surplus (please note USA's population replacement rate is amongst the hightest in developed countries). I wonder what he will say then.

"After all, the recent move was made only because of pressure by the United States of America, who blamed China for their current account deficit."

Not true. The pressure has also come from the EU, Japan, and even developing countries such as Brazil and India. The comments by government officials in these countries have been widely reported. China's action came a week before the G-20 summit in Toronto.

"The only correct approach to fixing a current account deficit is depreciating the currency, which will naturally make imports more expensive for people inside of the country and exports cheaper for people outside of the country. Sure, it would create some pain for the Americans, but it is only fair considering the way profited from the rest of the world in the past."

But, er, how would the US depreciate its currency versus the yuan if China keeps the yuan's value fixed against the dollar? In fact, the dollar did depreciate signicantly against most currencies last year: China's exchange-rate peg ensured that the yuan moved down with the dollar, depreciating against the currencies of most trading partners at a time when its economic growth and trade surplus were rebounding.

The real victims of China's currency policy are not the US but poorer, developing economies whose exports have become less competitive as a result.

Have I missed the point here? As an English expat working for a prominent Chinese company in Africa great inroads are being made by them in this forgotten continent. Although, far from prone they are moving at an extraordinary pace that leaves the rest of the western world, in my humble opinion a pace behind. Not an economist by education I cannot help but feel that they have a leading edge and are here to stay for as long as minerals are to be explored. The overall synopsis of this message is that it doesn't matter a jot about currency fluctuations in the short term but more to do with long term investments that will bolster China's economy in the long term into a super power. The Western world should address this. As hypocritical as it may sound I freely admit that I am. I have to earn a living!!! pay a mortgage, council tax, and more importantly put food on the table for the wife and children back home. Something for which I cannot do back home because I am too old. I am 54.

But, doesn’t China price its exports in US$? Aren’t most of its imports priced in US$? True it pays its wages in RMB, but these days labour is but a small percentage of most manufactured goods.
So, what good will happen from revaluing upwards the Yuan? China will loose a significant percentage of its reserves which are held in US$ government paper!

Not so fast on the "heading in the right direction" celebration. The announcement was a change in policy from a USD-RMB peg to a "controlled float," meaning the men in Beijing want more flexibility in a volatile global economy. To stave off speculators and promote export growth the CCP, not markets, will continue to set the yuan's value. With Europe,their largest export market, embarking on a very dicey austerity period, a falling euro partially off-sets the competitive advantage of a deliberately undervalued RMB. China's leaders want currency flexibility to meet likely volatility there.

But don't expect China to let the yuan slide much lower during G-20 talks or the current fury in US Congress. But after that, they may leak out or proclaim that it's value may fluctuate along with a "basket" of other benchmark values.

And keep in mind, that many very powerful US, Japanese, Taiwanese, South Korea and other corporations avail themselves of China's very low manufacturing cost structure, and therefore support their mercantilistic policies, including with fleets of lobbyists in D.C.

I regard the CCP's apparent endorsement of recent wage rises at foreign-owned and export-oriented factories (Honda, Toyota, Foxconn) as more significant than the currency float. It may signal that the Chinese government wants its workers to be paid more fairly--at foreign expense--so that the inevitable shift to greater domestic consumption can gain a bit of momentum before further collapse in foreign demand or greater protectionist barriers preclude other options.

After all, the recent move was made only because of pressure by the United States of America, who blamed China for their current account deficit. But the current account deficit of the largest economy of the world is certainly not determined by its trade with China, but also its trade with the rest of the world.

The only correct approach to fixing a current account deficit is depreciating the currency, which will naturally make imports more expensive for people inside of the country and exports cheaper for people outside of the country. Sure, it would create some pain for the Americans, but it is only fair considering the way profited from the rest of the world in the past.

The traditional way of the USA to correct such problems, however, is another one. It forces another country to increase the value of its currency, which is mostly painless for the USA, but very painful for the economy of the country in question.

China conducts only a small part (maybe a quarter) of its whole trade with the USA. Appreciating its currency to balance the current account with the USA, will not just reduce Chinese exports with the USA (as in the former scenario), but also the rest of the world.

This article should be about the US manipulating other currencies, instead of properly managing its own.